Here We Go Again: SWR 2.5% or 5.5%?

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Leesbro63
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Here We Go Again: SWR 2.5% or 5.5%?

Post by Leesbro63 »

Is it a new era? Must high stock and bond valuations (low interest rates) require us to lower our SWR to 2.5%? That's what I read in the Pittsburgh Post Gazette this morning: http://www.post-gazette.com/business/mo ... 1601150089

"Morningstar Investment Management in Chicago found in a 2013 study that if bond rates remained at these low levels, retirees stood a 50 percent chance of running out of money in 20 years if they stuck to the 4 percent withdrawal rule. That’s assuming they had a portfolio of 60 percent bonds and 40 percent stocks. Morningstar found if retirees started with an initial withdrawal rate of around 2.5 percent, it would raise the odds of making the money last."

Then I by chance decided to see if Jim Lange had any new podcasts...he's also a Pittsburgh source that is referenced here on Bogleheads often and who has a good radio show that podcasts here: http://www.paytaxeslater.com/radioshow.php

The latest podcast is by Jane Bryant Quinn, someone also respected by many Bogleheads. Certainly not a "hypster" type financial advisor. And on THIS podcast (number 163), http://www.paytaxeslater.com/radioshow/ ... ur_163.mp3, she says that the real SWR should probably actually be not the old 4%, but 12.5% more at 4.5%....and even as much as 5.5% if you can handle a bit more risk.

So I guess the actionable question is: Are times REALLY different, that the old rule no longer is a good bet? Or, as Quinn postulates, does the old rule take into account extreme situations and is not only valid, but perhaps even conservative?
Intrepyd
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Intrepyd »

I guess the real question is whether this is the new normal. How far in the future are valuations predictive?
randomguy
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by randomguy »

SWR are for a given portfolio. If you change that the numbers change. For example historically the 4% SWR is based on something like 60% S&P 500 and 40% corporate bonds. Change to treasuries it drops. Change to small cap value or add international and it goes up. Same time periods. Different results. And who knows if things like TIPs would have made the 70s more surviveable. There is a lot of mental anchoring around 4% because that was what the first study came up with. But it isn't like the 4.5% he got in later studies (by adding ~30% small cap if memory serves) is any less valid.


Forward predications are hard. I believe this is the morningstar paper (https://corporate.morningstar.com/us/do ... lRates.pdf). Here is one of the key assumptions
The analysis assumes a 1.0% fee, or negative
alpha, that is deducted from the portfolio value annually.
I would argue that is about .75% too high and maybe .9. That alone gets you close to a 3.5% SWR.

You could also debate the idea of reducing equity returns by 20% (because they felt like it:)) and their inflation assumption (3% is a good historical number. But maybe in the new world 2% is more accurate) and so on in all of these studies. They are at best educated guesses. The problem is that small differences like assuming inflation of 2% versus 3% or fees of .1 versus 1% drastically change the SWR number as they compound over time.

If you believe in the 2.5% SWR, you should be going like 20/80 stocks to bonds and investing all your bond money in TIPS. You will get over 2.5% even if the stocks do nothing.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by JZinCO »

randomguy wrote:SWR are for a given portfolio. If you change that the numbers change. For example historically the 4% SWR is based on something like 60% S&P 500 and 40% corporate bonds. Change to treasuries it drops. Change to small cap value or add international and it goes up. Same time periods. Different results. And who knows if things like TIPs would have made the 70s more surviveable. There is a lot of mental anchoring around 4% because that was what the first study came up with. But it isn't like the 4.5% he got in later studies (by adding ~30% small cap if memory serves) is any less valid.
On that note, it would behoove anyone to read Tyler (of Portfolio Charts)'s commentary here:
http://portfoliocharts.com/2015/11/17/h ... ates-work/
http://portfoliocharts.com/2015/09/08/w ... bly-wrong/

That said, academics like Wade Pfau have been recently saying that given the current environment current retirees might be facing conditions for which you cannot extrapolate past results. So while a 4% rule worked for the 60/40 portfolio in the past, it may not in the near future.

In addition, I think that pundits are beginning to acknowledge that the original success rate was defined as the number of times the portfolio did not hit 0, whereas most retirees wouldn't consider a portfolio of $100 at any given time, a success. So now a more conservative definition of SWR (e.g. sustainable WR) is leading to sub-4% recommendations.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by White Coat Investor »

A 2.5% withdrawal rate is stupid. It seems awfully easy to guarantee a 30 year SWR of 3.33% by simply buying TIPS paying 0% and laddering them. And then I look at current rates, and see that 30 year TIPS are paying not 0% real, but 1.33% real. Even the 5 years are paying 0.30%. Why in the world would the SWR for 30 years be less than 3.33%? It makes zero sense. If it were true, you could go from 2.5% to 3.33% with a less risky portfolio. Therefore, it probably isn't true.

On average, if you use a 4% SWR, you leave 2.8X what you had on the eve of retirement to your heirs 30 years later. On average, you're going to be able to take out more than 4%. If you start with something reasonable, and just adjust a bit as you go, you'll be fine. If you're so paranoid that you're taking a sub 3% withdrawal rate because you're scared you're going to run out of money, you need to go buy some SPIAs. A systematic withdrawal plan is not the right retirement spending plan for you.
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BahamaMan
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by BahamaMan »

EmergDoc wrote:A 2.5% withdrawal rate is stupid. It seems awfully easy to guarantee a 30 year SWR of 3.33% by simply buying TIPS paying 0% and laddering them. And then I look at current rates, and see that 30 year TIPS are paying not 0% real, but 1.33% real. Even the 5 years are paying 0.30%. Why in the world would the SWR for 30 years be less than 3.33%? It makes zero sense. If it were true, you could go from 2.5% to 3.33% with a less risky portfolio. Therefore, it probably isn't true.

On average, if you use a 4% SWR, you leave 2.8X what you had on the eve of retirement to your heirs 30 years later. On average, you're going to be able to take out more than 4%. If you start with something reasonable, and just adjust a bit as you go, you'll be fine. If you're so paranoid that you're taking a sub 3% withdrawal rate because you're scared you're going to run out of money, you need to go buy some SPIAs. A systematic withdrawal plan is not the right retirement spending plan for you.
+1 ..... Exactly.......

But why bother guessing. Use VPW and you can start with about 4.5% of your portfolio. Then whatever happens your withdrawal rate will be adjusted to match the circumstances. Nice to know you can't fail whether 2% or 5%.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by longinvest »

EDIT: The two posts above ^^^ beat me to it. It took me too long to write mine.

*** News Flash *** News Flash ***

A 100% bonds portfolio, on July 27, 2015, had an actually safe withdrawal rate (SWR) of exactly 3.7%, with no risk of premature depletion and full inflation protection!

How do I know this? Because of the following post by forum member #Cruncher doing the calculation for a 30-years non-rolling TIPS ladder.

In other words, all the less than 3.5% SWR talk (I'm rounding it down) is fear mongering and completely unjustified.

Of course, if one adds stocks to the portfolio, one should also be flexible and shouldn't use SWR as a withdrawal method. SWR is meant as a planning tool (How much should I accumulate before retiring?); SWR was never meant as an actual withdrawal method! It happens to work with a non-rolling TIPS ladder, but it was not meant to be used that way.

There exist flexible withdrawal methods for diversified Bogleheads portfolios. Our wiki has a complete page with various wiki: Withdrawal methods, ranging from inflexible to flexible, and in between. My preferred one is VPW which adapts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement.
Last edited by longinvest on Tue Jan 19, 2016 4:49 pm, edited 1 time in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
randomguy
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by randomguy »

JZinCO wrote: On that note, it would behoove anyone to read Tyler (of Portfolio Charts)'s commentary here:
http://portfoliocharts.com/2015/11/17/h ... ates-work/
http://portfoliocharts.com/2015/09/08/w ... bly-wrong/
Of course using 1972+ data yields higher numbers. He is ignoring the worst periods in US history which set the 4% SWR. Seriously you have to dredge up data at least back to 1966 (I realize getting stuff on the great depression period is pushing it) if you are doing a calculator.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by JZinCO »

randomguy wrote:
JZinCO wrote: On that note, it would behoove anyone to read Tyler (of Portfolio Charts)'s commentary here:
http://portfoliocharts.com/2015/11/17/h ... ates-work/
http://portfoliocharts.com/2015/09/08/w ... bly-wrong/
Of course using 1972+ data yields higher numbers. He is ignoring the worst periods in US history which set the 4% SWR. Seriously you have to dredge up data at least back to 1966 (I realize getting stuff on the great depression period is pushing it) if you are doing a calculator.
That is a red herring.

edit: I'll 'splain. It doesn't matter if you don't like the returns in that dataset. Let's pretend we have three asset classes X, Y and Z. Each of them has a different degree of volatility in returns, each of them has a different set of averaged returns. Because this is true, different portfolios including different proportions of X, Y, and/or Z will have different SWRs because the behavior of their sequences of returns are different. That is the point.
Last edited by JZinCO on Tue Jan 19, 2016 5:54 pm, edited 1 time in total.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by gilgamesh »

EmergDoc wrote:A 2.5% withdrawal rate is stupid. It seems awfully easy to guarantee a 30 year SWR of 3.33% by simply buying TIPS paying 0% and laddering them. And then I look at current rates, and see that 30 year TIPS are paying not 0% real, but 1.33% real. Even the 5 years are paying 0.30%. Why in the world would the SWR for 30 years be less than 3.33%? It makes zero sense. If it were true, you could go from 2.5% to 3.33% with a less risky portfolio. Therefore, it probably isn't true.

On average, if you use a 4% SWR, you leave 2.8X what you had on the eve of retirement to your heirs 30 years later. On average, you're going to be able to take out more than 4%. If you start with something reasonable, and just adjust a bit as you go, you'll be fine. If you're so paranoid that you're taking a sub 3% withdrawal rate because you're scared you're going to run out of money, you need to go buy some SPIAs. A systematic withdrawal plan is not the right retirement spending plan for you.
Wow! then what's the risk at all? I mean if more risk always has a higher reward, then what's the risk at all?
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by randomguy »

longinvest wrote:EDIT: The two posts above ^^^ beat me to it. It took me too long to write mine.

*** News Flash *** News Flash ***

A 100% bonds portfolio, on July 27, 2015, had an actually safe withdrawal rate (SWR) of exactly 3.7%, with no risk of premature depletion and full inflation protection!

How do I know this? Because of the following post by forum member #Cruncher doing the calculation for a 30-years non-rolling TIPS ladder.

In other words, all the less than 3.5% SWR talk (I'm rounding it down) is fear mongering and completely unjustified.
The problem is the same as with buying annuities. You have to give up all your upside to get that 3.7%. You live 30 years, die on time, and have 0 bucks in your account. The stock person who runs the risk of having like a 3.3% (i.e. the 2.5%+.8% in fee refunds) has the upside of ending up with 2x as much money as they started with. Up to you to decide if that upside is worth the risk or not.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by randomguy »

JZinCO wrote:
randomguy wrote:
JZinCO wrote: On that note, it would behoove anyone to read Tyler (of Portfolio Charts)'s commentary here:
http://portfoliocharts.com/2015/11/17/h ... ates-work/
http://portfoliocharts.com/2015/09/08/w ... bly-wrong/
Of course using 1972+ data yields higher numbers. He is ignoring the worst periods in US history which set the 4% SWR. Seriously you have to dredge up data at least back to 1966 (I realize getting stuff on the great depression period is pushing it) if you are doing a calculator.
That is a red herring.
How so? If I post a study saying that the SWR is 9% and it has never failed, you don't think it is important that I mention I am only using 1980+ data? The text of the paper is decent if I remember correctly (it has been a while since I read it) but the calculators are useless given the limited data set.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by JZinCO »

randomguy wrote:
JZinCO wrote:
randomguy wrote:
JZinCO wrote: On that note, it would behoove anyone to read Tyler (of Portfolio Charts)'s commentary here:
http://portfoliocharts.com/2015/11/17/h ... ates-work/
http://portfoliocharts.com/2015/09/08/w ... bly-wrong/
Of course using 1972+ data yields higher numbers. He is ignoring the worst periods in US history which set the 4% SWR. Seriously you have to dredge up data at least back to 1966 (I realize getting stuff on the great depression period is pushing it) if you are doing a calculator.
That is a red herring.
How so? If I post a study saying that the SWR is 9% and it has never failed, you don't think it is important that I mention I am only using 1980+ data? The text of the paper is decent if I remember correctly (it has been a while since I read it) but the calculators are useless given the limited data set.
I added an edit to my earlier post. Take the references in context (me quoting you to back up your point by using a site that provides illustrations of the importance of asset holdings on WR).
The context of my post was not "hey guys. Look, this guy discovered a better WR!"

It is a red herring to discount my post by arguing that derivations of WR depend on the conditions on which they are built. Of course that's true. That wasn't what I said or argued for.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by itstoomuch »

Lots of ways you can manipulated Interest (SWR): starting value, ending value, rate, duration, period, periodic contribution/distribution and Risk.

Lots of BH focus on SWR but ignore the ending value until it's too late to do much. Others focus on ending value and then obsess about the SWR because they haven't secured the Alphas and Betas of the portfolio

FYI: We are comfortable with 4% SWR from our portfolio, lifetime, and excess of our needs and leave a legacy. I base our most optimistic projections on 5.5% (some of our annuities (2012) guarantee 6.5%). With the recent rental from inheritance, 6%+ SWR.
I focused on who assumes the Risk. :idea:
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by looking »

Leesbro63 wrote:Is it a new era? Must high stock and bond valuations (low interest rates) require us to lower our SWR to 2.5%? That's what I read in the Pittsburgh Post Gazette this morning: http://www.post-gazette.com/business/mo ... 1601150089

"Morningstar Investment Management in Chicago found in a 2013 study that if bond rates remained at these low levels, retirees stood a 50 percent chance of running out of money in 20 years if they stuck to the 4 percent withdrawal rule. That’s assuming they had a portfolio of 60 percent bonds and 40 percent stocks. Morningstar found if retirees started with an initial withdrawal rate of around 2.5 percent, it would raise the odds of making the money last."

Then I by chance decided to see if Jim Lange had any new podcasts...he's also a Pittsburgh source that is referenced here on Bogleheads often and who has a good radio show that podcasts here: http://www.paytaxeslater.com/radioshow.php

The latest podcast is by Jane Bryant Quinn, someone also respected by many Bogleheads. Certainly not a "hypster" type financial advisor. And on THIS podcast (number 163), http://www.paytaxeslater.com/radioshow/ ... ur_163.mp3, she says that the real SWR should probably actually be not the old 4%, but 12.5% more at 4.5%....and even as much as 5.5% if you can handle a bit more risk.

So I guess the actionable question is: Are times REALLY different, that the old rule no longer is a good bet? Or, as Quinn postulates, does the old rule take into account extreme situations and is not only valid, but perhaps even conservative?

what is swr ????
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by BahamaMan »

looking wrote:what is swr ????
Well, Google says it is "Standing Wave Ratio", but around here it means Safe Withdrawal Rate -
Last edited by BahamaMan on Tue Jan 19, 2016 7:00 pm, edited 1 time in total.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by hnzw rui »

Doesn't the 4% rule increase withdrawals every year based on CPI?

I don't know about folks here but my salary doesn't go always go up with inflation. Sometimes it's flat and on a few occasions (namely 2008-2011), it even goes down. When that happens, I don't increase my spending by how much the CPI went up. I'd find ways to cut costs. If salary goes up or I do a lot of overtime, then I'd treat myself and the family a little. I don't see why things should be radically different in retirement.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by JZinCO »

hnzw rui wrote:Doesn't the 4% rule increase withdrawals every year based on CPI?

I don't know about folks here but my salary doesn't go always go up with inflation. Sometimes it's flat and on a few occasions (namely 2008-2011), it even goes down. When that happens, I don't increase my spending by how much the CPI went up. I'd find ways to cut costs. If salary goes up or I do a lot of overtime, then I'd treat myself and the family a little. I don't see why things should be radically different in retirement.
That's a fair reactionary measure, Just don't think you could follow that for more than a short period of time.
Consider if you retired in 1990, intent on withdrawing what is equivalent to a purchasing power of $40,000 (in 2016 dollars). So, you retire, totally happy spending 22,000 dollars in 1990. The CPI goes up, but you are wise enough to cut spending. You keep doing this, and you found that over 26 years, in an effort to keep spending only $22,000 nominally, that you have chosen to halve the value of your expenses..... meanwhile your initial portfolio of $550,000 is ballooning because you started at 4% WR but are now only withdrawing ~2.2%, or less, if it grew at least the rate of inflation.

I say, don't let a fear of inflation drive you to the poor house; select a proactive (e.g. investing in assets that grow with inflation) rather than reactive strategy.
Last edited by JZinCO on Tue Jan 19, 2016 7:27 pm, edited 3 times in total.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by k66 »

hnzw rui wrote:Doesn't the 4% rule increase withdrawals every year based on CPI?

I don't know about folks here but my salary doesn't go always go up with inflation. Sometimes it's flat and on a few occasions (namely 2008-2011), it even goes down. When that happens, I don't increase my spending by how much the CPI went up. I'd find ways to cut costs. If salary goes up or I do a lot of overtime, then I'd treat myself and the family a little. I don't see why things should be radically different in retirement.
The 4% rule is a concept and a concept only. It is not really a de facto depletion model, at least not a very realistic one.

It's more useful to describe how large a portfolio you need to have to have a reasonable chance of surviving a longish retirement.

As others have noted, models like VPW are more robust & realistic.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by hnzw rui »

JZinCO wrote:
hnzw rui wrote:Doesn't the 4% rule increase withdrawals every year based on CPI?

I don't know about folks here but my salary doesn't go always go up with inflation. Sometimes it's flat and on a few occasions (namely 2008-2011), it even goes down. When that happens, I don't increase my spending by how much the CPI went up. I'd find ways to cut costs. If salary goes up or I do a lot of overtime, then I'd treat myself and the family a little. I don't see why things should be radically different in retirement.
Sounds a little naive to think one could adjust for inflation (such that nominal spending is constant) for a long period of time.
Consider if you retired in 1990, intent on withdrawing what is equivalent to a purchasing power of $40,000 (in 2016 dollars). So, you retire, totally happy spending 22,000 dollars in 1990. The CPI goes up, but you are wise enough to cut spending. You keep doing this, and you found that over 26 years, in an effort to keep spending only $22,000 nominally, that you have chosen to halve the value of your expenses.....
If that's how you want to plan, that's totally fine but you should acknowledge that.
I didn't say one should never adjust for inflation. Over a 30-year retirement, there's bound to have been some good returns along with the bad to more or less keep up with inflation. I think 4% is a fairly conservative SWR which already has quite a bit of give. My point is, when your portfolio is down, then tighten the belt a little, maybe skip that European vacation. You don't just blindly increase withdrawals based on CPI when your portfolio's down 20%. Just go on the trip when the portfolio's recovered.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by edge »

I don't use swr. Best strategy is income floor and variable withdrawal rate.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Watty »

looking wrote:what is swr ????
Safe withdrawl rate.

https://www.bogleheads.org/wiki/Safe_withdrawal_rates
longinvest wrote: How do I know this? Because of the following post by forum member #Cruncher doing the calculation for a 30-years non-rolling TIPS ladder.

In other words, all the less than 3.5% SWR talk (I'm rounding it down) is fear mongering and completely unjustified.
It is a stretch but TIPS would not work well in a taxable account.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by randomguy »

hnzw rui wrote: I didn't say one should never adjust for inflation. Over a 30-year retirement, there's bound to have been some good returns along with the bad to more or less keep up with inflation. I think 4% is a fairly conservative SWR which already has quite a bit of give. My point is, when your portfolio is down, then tighten the belt a little, maybe skip that European vacation. You don't just blindly increase withdrawals based on CPI when your portfolio's down 20%. Just go on the trip when the portfolio's recovered.
And what is a little? And are you willing to give up that trip if the portfolio doesn't recover even though you have enough money? For example if you had retire in 1966 when and how you would have tightened? Or if that is too long ago, what would the adjustments for the 2000 retiree? Most retirees will never face these issues (i.e. there are only a couple of really extended bad times in US history for people holding something like a 50/50 portfolio. Things like 2008-9 happen but are just blips because they are so short).

Various withdrawal studies try to give guideance on much you should adapt. They can vary from none (i.e. the standard 4%) to rapid reactions to market conditions (VPW and the flat % of portfolio schemes) and everything in between. There is never going to be one answer to these questions because people have different goals and fears. The person who has dreamed of traveling the world should be willing to front load expenses to live the dream. The person who is loses sleep worrying about running out of money might do the opposite.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (retirement planning).
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by JonnyDVM »

I feel sorry for those who insist on calculating a SWR of 3% or less. You're going to die with a load of unspent money you worked a lifetime to earn. Also, no one spends the same amount at 87 as the do at 63, so the whole "everything must be perfect engineered and I will withdrawal exactly 2.79% of my portfolio for 30 years" is not a true to life calculation. I'm far from retirement, but in my early rough estimates on Fire Calc I'm pulling 4% for 30 years with a 94% chance of success. I like those odds!
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by White Coat Investor »

JonnyDVM wrote:I feel sorry for those who insist on calculating a SWR of 3% or less. You're going to die with a load of unspent money you worked a lifetime to earn.
Not necessarily true. I mean, they may be paying an advisor 1%. Or perhaps they have terrible investing behavior/discipline. Or an inappropriately conservative asset allocation etc. Lots of reasons that many people perhaps should use a 3% SWR. But I'm not going to.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by gilgamesh »

edge wrote:I don't use swr. Best strategy is income floor and variable withdrawal rate.
Why?...why not just VWR? Thanks!
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by gilgamesh »

JonnyDVM wrote:I feel sorry for those who insist on calculating a SWR of 3% or less. You're going to die with a load of unspent money you worked a lifetime to earn. Also, no one spends the same amount at 87 as the do at 63, so the whole "everything must be perfect engineered and I will withdrawal exactly 2.79% of my portfolio for 30 years" is not a true to life calculation. I'm far from retirement, but in my early rough estimates on Fire Calc I'm pulling 4% for 30 years with a 94% chance of success. I like those odds!
Is there any study that shows the sample size of SWR studies is sufficient to predict that the worst that could happen in the next 30-40 years will be better or equal to the period chosen for any SWR study?
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by IlliniDave »

JonnyDVM wrote:I feel sorry for those who insist on calculating a SWR of 3% or less. You're going to die with a load of unspent money you worked a lifetime to earn. Also, no one spends the same amount at 87 as the do at 63, so the whole "everything must be perfect engineered and I will withdrawal exactly 2.79% of my portfolio for 30 years" is not a true to life calculation. I'm far from retirement, but in my early rough estimates on Fire Calc I'm pulling 4% for 30 years with a 94% chance of success. I like those odds!
3% is my rule of thumb for planning, and no need to feel sorry for me. I plan on a longish retirement (checking out sometime between 52 and 55). I actually hope I have a load of unspent money at the end of my life. At this point and for the foreseeable future I enjoy a relatively humble lifestyle, so sizing for a 3% systematic withdrawal (I think "safe" is misleading) is not as onerous as it might seem, and it gives me upside flexibility should I need or want to spend more in later life. I can easily see myself spending more at 87 than at 63.

And the percent stuff is all rather arbitrary anyway. I plan to spend somewhere between what I truly need to spend and what I want to spend each year. Year-to-year I expect a lot of fluctuation. It's going to take both some luck and the ability to adapt to whatever vagaries life dishes up to be successful.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Leesbro63 »

EmergDoc wrote:
JonnyDVM wrote:I feel sorry for those who insist on calculating a SWR of 3% or less. You're going to die with a load of unspent money you worked a lifetime to earn.
Not necessarily true. I mean, they may be paying an advisor 1%. Or perhaps they have terrible investing behavior/discipline. Or an inappropriately conservative asset allocation etc. Lots of reasons that many people perhaps should use a 3% SWR. But I'm not going to.
For what it's worth, I have found it useful to describe someone with a 4% SWR with an adviser to "be paying 25% of his income to the adviser".
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Quark »

gilgamesh wrote:
JonnyDVM wrote:I feel sorry for those who insist on calculating a SWR of 3% or less. You're going to die with a load of unspent money you worked a lifetime to earn. Also, no one spends the same amount at 87 as the do at 63, so the whole "everything must be perfect engineered and I will withdrawal exactly 2.79% of my portfolio for 30 years" is not a true to life calculation. I'm far from retirement, but in my early rough estimates on Fire Calc I'm pulling 4% for 30 years with a 94% chance of success. I like those odds!
Is there any study that shows the sample size of SWR studies is sufficient to predict that the worst that could happen in the next 30-40 years will be better or equal to the period chosen for any SWR study?
There's always the possibility that the future will be worse than the past, no matter how many data points. Advocates of using history assume the past is an adequate guide to the future and tend to ignore that we only have a small handful (at most) of 30 year independent data points.

A TIPS later could guaranteed you safety for 30 years, but you risk living longer than 30 years.

An annuity guarantees income for life, subject to the credit risk of the insurer and, in most cases, inflation risk. Variable withdrawal strategies can guarantee you'll never run out of money, but spending can vary, especially in real terms.

It seems that the best you can do is pick something that seems reasonable, adjust based on balancing spending desires and risk, and hope things work out.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Rodc »

Part of the problem is that it makes no sense to base a 30-year plan on a fixed withdrawal that never changes even as markets provide poor returns.

SWR is very sensitive to assumptions. That is if one knows (say by looking at past data and asking what would have worked) the SWR then anything below that is very safe and anything even marginally higher is not safe.

Since we do not get to live our lives moving back through time we do not know where this knife edge will lie for us.

So we either have to use a very low withdrawal rate or we have to be more flexible in our spending where we can tighten our belts in lean times so we have a decent portfolio left to rise when good times return.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by White Coat Investor »

Leesbro63 wrote:
EmergDoc wrote:
JonnyDVM wrote:I feel sorry for those who insist on calculating a SWR of 3% or less. You're going to die with a load of unspent money you worked a lifetime to earn.
Not necessarily true. I mean, they may be paying an advisor 1%. Or perhaps they have terrible investing behavior/discipline. Or an inappropriately conservative asset allocation etc. Lots of reasons that many people perhaps should use a 3% SWR. But I'm not going to.
For what it's worth, I have found it useful to describe someone with a 4% SWR with an adviser to "be paying 25% of his income to the adviser".
I saw a pretty good argument that isn't as bad as you would think. I think it was on Kitce's blog. Basically the gist of it was that if the markets did well, you would have no problem paying the adviser and if they did poorly, you wouldn't have to pay the advisor as much. Of course, in year one, you're absolutely right- the advisor gets 25% of your income.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by SQRT »

EmergDoc wrote:A 2.5% withdrawal rate is stupid. It seems awfully easy to guarantee a 30 year SWR of 3.33% by simply buying TIPS paying 0% and laddering them. And then I look at current rates, and see that 30 year TIPS are paying not 0% real, but 1.33% real. Even the 5 years are paying 0.30%. Why in the world would the SWR for 30 years be less than 3.33%? It makes zero sense. If it were true, you could go from 2.5% to 3.33% with a less risky portfolio. Therefore, it probably isn't true.

On average, if you use a 4% SWR, you leave 2.8X what you had on the eve of retirement to your heirs 30 years later. On average, you're going to be able to take out more than 4%. If you start with something reasonable, and just adjust a bit as you go, you'll be fine. If you're so paranoid that you're taking a sub 3% withdrawal rate because you're scared you're going to run out of money, you need to go buy some SPIAs. A systematic withdrawal plan is not the right retirement spending plan for you.
Very well put. I agree (obviously). Way too much fear mongering going on relating to SWR. Probably increases in bad markets? In my view anything under 3%-3.5% is just going to make your heirs rich. If that's the plan, fine, but most people don't mention that as a primary goal.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by gilgamesh »

Quark wrote: There's always the possibility that the future will be worse than the past, no matter how many data points. Advocates of using history assume the past is an adequate guide to the future and tend to ignore that we only have a small handful (at most) of 30 year independent data points.

Sounds like faith more than statistics.

A TIPS later could guaranteed you safety for 30 years, but you risk living longer than 30 years.

An annuity guarantees income for life, subject to the credit risk of the insurer and, in most cases, inflation risk. Variable withdrawal strategies can guarantee you'll never run out of money, but spending can vary, especially in real terms.

It seems that the best you can do is pick something that seems reasonable, adjust based on balancing spending desires and risk, and hope things work out.

"Hope"...well put!

Problems you mentioned were,...with TIPS is living longer than 30 years.... Annuity is credit risk and inflation. How about TIPS for 30 years followed by an annuity ladder with different companies (ladder to keep up with inflation and withb different companies to diversify the credit risk)?

Wouldn't that elimniate all of the issues you've mentioned?

To me, that sounds like something reasonable without having to hope it will work out.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by edge »

Two reasons:

1) If I die, my wife does not need to manage withdrawals or a portfolio. She just gets the deposits from the income floor. Withdrawals can be done on an exception basis (e.g. car purchase).

2) The portfolio can be managed as a legacy portfolio (e.g. static allocation 60/40) with a higher exposure to risky assets than she or I may be comfortable with at more advanced age without the guaranteed income. In other words, a strong volatility cushion.

Another reason is the much higher income from the income floor instruments than would be thrown off by bonds for example. Very different instruments with different characteristics of course.
gilgamesh wrote:
edge wrote:I don't use swr. Best strategy is income floor and variable withdrawal rate.
Why?...why not just VWR? Thanks!
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Quark »

gilgamesh wrote:
Quark wrote: There's always the possibility that the future will be worse than the past, no matter how many data points. Advocates of using history assume the past is an adequate guide to the future and tend to ignore that we only have a small handful (at most) of 30 year independent data points.

Sounds like faith more than statistics.

A TIPS later could guaranteed you safety for 30 years, but you risk living longer than 30 years.

An annuity guarantees income for life, subject to the credit risk of the insurer and, in most cases, inflation risk. Variable withdrawal strategies can guarantee you'll never run out of money, but spending can vary, especially in real terms.

It seems that the best you can do is pick something that seems reasonable, adjust based on balancing spending desires and risk, and hope things work out.
"Hope"...well put!

Problems you mentioned were,...with TIPS is living longer than 30 years.... Annuity is credit risk and inflation. How about TIPS for 30 years followed by an annuity ladder with different companies (ladder to keep up with inflation and withb different companies to diversify the credit risk)?

Wouldn't that elimniate all of the issues you've mentioned?

To me, that sounds like something reasonable without having to hope it will work out.
I believe most who advocate a TIPS ladder for 30 years would spend all principal and interest over those 30 years, so there would be nothing left to annuitize. Also, the annuity withdrawal rate 30 years out is hard to predict at this point. I'm not clear how an annuity ladder protects against inflation (assuming nominal annuities; there aren't enough 'real' annuities).
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Leesbro63 »

Plus for large (and maybe not so large) taxable accounts, if we get a big whiff of the very inflation that TIPS are supposed to protect against, taxflation will kick in and eat at the real returns ANYWAY.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Quark »

Leesbro63 wrote:Plus for large (and maybe not so large) taxable accounts, if we get a big whiff of the very inflation that TIPS are supposed to protect against, taxflation will kick in and eat at the real returns ANYWAY.
I wonder what would do better. Munis might work if their rates increased to keep pace with inflation.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Rodc »

If one came to the considered opinion that the SWR was 2.5% why would they not annuitize a good portion of their portfolio and lock in something rather greater?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Leesbro63 »

Quark wrote:
Leesbro63 wrote:Plus for large (and maybe not so large) taxable accounts, if we get a big whiff of the very inflation that TIPS are supposed to protect against, taxflation will kick in and eat at the real returns ANYWAY.
I wonder what would do better. Munis might work if their rates increased to keep pace with inflation.
If my Chevy had a Blue Oval, it would be a Ford. Your point is correct but can't exist. Even in a tax-deferred IRA type account, the taxflation will balloon the balance and cause more tax slippage, upon eventual withdrawal, than had the inflation not occurred. The only way it could really work would be in a ROTH IRA. And that assumes that estate tax threshold amounts rise with inflation.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by awval999 »

Rodc wrote:If one came to the considered opinion that the SWR was 2.5% why would they not annuitize a good portion of their portfolio and lock in something rather greater?
Because a small minority on this board literally have a disorder/addictive personality in regards with finances, specifically saving money and deferring any type of financial gratification.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by cherijoh »

JonnyDVM wrote:I feel sorry for those who insist on calculating a SWR of 3% or less. You're going to die with a load of unspent money you worked a lifetime to earn. Also, no one spends the same amount at 87 as the do at 63, so the whole "everything must be perfect engineered and I will withdrawal exactly 2.79% of my portfolio for 30 years" is not a true to life calculation. I'm far from retirement, but in my early rough estimates on Fire Calc I'm pulling 4% for 30 years with a 94% chance of success. I like those odds
I agree that some people have contingency upon contingency built into their plan and will probably leave a lot of money on the table. However, I wouldn't get too complacent about the 94% projected success rate either! It is contingent on a 30 year life span. You could live well beyond the median age, so 30 years may not be enough if you are retiring early. What does Firecalc give you if you assume an extra 10 years? Also, if you are unlucky enough to end up in a nursing home for an extended period, you could end up spending as much at 87 as you do at 63.

I think a lot depends on how much discretionary spending is already included in your retirement budget that could be cut if there was an extended recession. If your budget is bare bones, then I wouldn't feel comfortable planning based on 4%. But if it included a generous travel budget, then 4% is probably fine. My big :?: will be health care since I will be retiring long before I'm eligible for Medicare.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by BahamaMan »

cherijoh wrote: If your budget is bare bones, then I wouldn't feel comfortable planning based on 4%. But if it included a generous travel budget, then 4% is probably fine.
You're Right.... The key is a Budget with a Large discretionary Spending Portion!

I would not feel 'comfortable with any SWR that is a Fixed Percentage and Inflation Adjusted.

Just use VPW and you can probably spend more money and it can't fail.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Quark »

Leesbro63 wrote:
Quark wrote:
Leesbro63 wrote:Plus for large (and maybe not so large) taxable accounts, if we get a big whiff of the very inflation that TIPS are supposed to protect against, taxflation will kick in and eat at the real returns ANYWAY.
I wonder what would do better. Munis might work if their rates increased to keep pace with inflation.
If my Chevy had a Blue Oval, it would be a Ford. Your point is correct but can't exist. Even in a tax-deferred IRA type account, the taxflation will balloon the balance and cause more tax slippage, upon eventual withdrawal, than had the inflation not occurred. The only way it could really work would be in a ROTH IRA. And that assumes that estate tax threshold amounts rise with inflation.
Are you saying the interest rate paid by munis won't rise with rising inflation? The rate might or might not go up 1:1, but it should increase. If you're not selling bonds (which can be a big if), then you'll get more income and shouldn't have any adverse tax consequences.

Taxflation will have a negative impact on TIPS in taxable, but perhaps not a big a hit as you suppose (hard to tell just what you suppose). I haven't run numbers on this in a while, but if I recall correctly, inflation would have to get rather high to have a major effect. Plus, TIPS interest is exempt from state taxation, which can be quite helpful.

Anyway, do you believe there's something in taxable that would do better?
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Leesbro63 »

50/50 Stocks/munis.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by Khanmots »

JonnyDVM wrote:I feel sorry for those who insist on calculating a SWR of 3% or less. You're going to die with a load of unspent money you worked a lifetime to earn.
Depends on how many years you want to be prepared for in retirement. Once you start getting up near 50, a 2.5% SWR starts making a lot more sense.
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by arcticpineapplecorp. »

Leesbro63 wrote:Is it a new era? Must high stock and bond valuations (low interest rates) require us to lower our SWR to 2.5%? That's what I read in the Pittsburgh Post Gazette this morning: http://www.post-gazette.com/business/mo ... 1601150089

"Morningstar Investment Management in Chicago found in a 2013 study that if bond rates remained at these low levels, retirees stood a 50 percent chance of running out of money in 20 years if they stuck to the 4 percent withdrawal rule. That’s assuming they had a portfolio of 60 percent bonds and 40 percent stocks. Morningstar found if retirees started with an initial withdrawal rate of around 2.5 percent, it would raise the odds of making the money last."

Then I by chance decided to see if Jim Lange had any new podcasts...he's also a Pittsburgh source that is referenced here on Bogleheads often and who has a good radio show that podcasts here: http://www.paytaxeslater.com/radioshow.php

The latest podcast is by Jane Bryant Quinn, someone also respected by many Bogleheads. Certainly not a "hypster" type financial advisor. And on THIS podcast (number 163), http://www.paytaxeslater.com/radioshow/ ... ur_163.mp3, she says that the real SWR should probably actually be not the old 4%, but 12.5% more at 4.5%....and even as much as 5.5% if you can handle a bit more risk.

So I guess the actionable question is: Are times REALLY different, that the old rule no longer is a good bet? Or, as Quinn postulates, does the old rule take into account extreme situations and is not only valid, but perhaps even conservative?
I heard some past podcasts of James Lange in which he talked to Jane Bryant Quinn so I'm not sure if it's the same one (a repeat) or new, but my take on her saying the SWR could be higher was partly related to the age of the retiree. She said something to the effect of 4% might be fine for someone in their 60s but if someone's in their 90's then the percentage would be much higher (because of the decreased lifespan). Guess it's really no different than the IRS tables for RMD withdrawals from 401(k)s and IRA(s), non-Roth of course. Those tables start out with 3-4% withdrawals at 70 years of age and go up higher from there having one take 100% of the portfolio once one's past the life expectancy. That's what I took from it.

If the IRS doesn't stick to a 4% withdrawal rate for RMDs, then why should you?
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by edge »

Yes, that is what I suggested.
Rodc wrote:If one came to the considered opinion that the SWR was 2.5% why would they not annuitize a good portion of their portfolio and lock in something rather greater?
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Re: Here We Go Again: SWR 2.5% or 5.5%?

Post by hnzw rui »

arcticpineapplecorp. wrote:I heard some past podcasts of James Lange in which he talked to Jane Bryant Quinn so I'm not sure if it's the same one (a repeat) or new, but my take on her saying the SWR could be higher was partly related to the age of the retiree. She said something to the effect of 4% might be fine for someone in their 60s but if someone's in their 90's then the percentage would be much higher (because of the decreased lifespan). Guess it's really no different than the IRS tables for RMD withdrawals from 401(k)s and IRA(s), non-Roth of course. Those tables start out with 3-4% withdrawals at 70 years of age and go up higher from there having one take 100% of the portfolio once one's past the life expectancy. That's what I took from it.

If the IRS doesn't stick to a 4% withdrawal rate for RMDs, then why should you?
RMDs go to around 50% of remaining portfolio balance once you hit 115 (uniform lifetime table) so you don't actually need to deplete tax deferred accounts completely. The account just becomes smaller and smaller. :P Mind, RMDs do apply to Roth 401(k) so you want to roll that over to Roth IRA before you hit 70.5. :happy

For a 45 year retirement, SWR for 100% success rate with 65/35 portfolio is 3.26% on FIRECalc. Longer periods drop off the late 60s which seem to be worst case thus far.

RMDs for inherited IRA are higher.
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